Financial Services Report

August 2, 2017

Our Take

Loyal readers may recall that we had said the best way to view Washington this year was to consider it is a play in four acts.   Perhaps we chose the wrong medium.  Regardless of form, with the House gone for the August recess, and the Senate left in disarray following the dramatic demise of the Obamacare repeal effort, the third act of this drama has come to close, leaving the audience with quite a cliffhanger.  Can they pivot to tax reform?  Can they raise the debt ceiling and fund the government?  Will the President be indicted, and if so, will he pardon himself?  Will North Korean launch a nuclear strike on the mainland?

Stay tuned as all of this – and probably much, much, more – will be on the agenda for next act of this drama we call Washington 2017.

Looking Ahead

Near Term

  • The House is in Recess until September 6th.
  • The Senate is in session, through the second week of August, though speculation is rampant that they will leave after this week. 

Further Out

  • The Debt Ceiling must be dealt with by September 29th.
  • Funding for the government is set to run out on September 30th.

The Past Week

Legislative Branch
House Approves CRA Resolution to Undo CFPB Arbitration Rule
As expected, the House last week voted 231-190 to approve a resolution (H.J. Res. 111) that would repeal the Consumer Financial Protection Bureau’s (CFPB) recently finalized rule that effectively prohibits financial institutions from using mandatory arbitration clauses  in their consumer contracts. The resolution passed on a near party-line vote, with only Rep. Walter Jones (R-NC) joining Democrats to vote in opposition. Consideration of the companion measure (S.J. Res. 47) in the Senate is expected to be much tighter, with at least three Republican Senators considering voting with Democrats to oppose the rule.   Under the provisions of the Congressional Review Act (CRA), there is a small window of 60 session days when the vote in the Senate can be approved on a simple majority vote rather than by the Senate’s traditional 60-vote threshold.  
House Panel Approves FSOC, Municipal Bond Bills
On Tuesday, The House Financial Services Committee approved a series of bipartisan bills that seek to: (1) extend the term of the Financial Stability Oversight Council's insurance expert (H.R. 3110); (2) give banks greater flexibility to use municipal debt to satisfy a liquidity rule (H.R. 1624), and; (3) make it easier for some firms to issue securities (H.R. 2864). Additionally, the panel approved another bill that would impose new conditions on World Bank funding. However, the committee did not approve a Democratic-sponsored resolution that sought documents from the Treasury department related to President Trump’s financial ties to Russia and Deutsche Bank.
Mnuchin Testifies on International Financial System to House Financial Services Committee
On Thursday, the House Financial Services Committee held a hearing on “The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System.” Secretary Steve Mnuchin was invited to testify. The hearing broadly covered tax, banking, and housing finance reform, as well as providing details on the report ordered by the White House to review the 2010 Dodd-Frank financial reform law. Sec. Mnuchin also elaborated on his view of the Volcker rule and how the complexity and disconnect from trading desk to trading desk helped form this view.
Waters to Oppose Hensarling’s Flood Insurance Bill
Last Thursday, House Financial Services Ranking Member Maxine Waters (D-CA) announced her opposition to Chairman Jeb Hensarling's (R-TX) latest proposal for reauthorizing and overhauling the National Flood Insurance Program.  Instead she threw her support behind the Senate version of Flood reform.  Waters opposition comes even after Chairman Hensarling indicated a willingness to remove certain controversial provisions from his bill.   Ms. Waters’ opposition could be a significant hurdle as Hensarling tries to put forward a bipartisan package before the program expires at the end of September.
Judiciary Subcommittee Examines Bill to Barring States from Imposing Taxes Beyond State Lines
On Tuesday, the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Lad held a hearing entitled “No Regulation Without Representation: H.R. 2887 and the Growing Problem of States Regulating Beyond Their Borders.” While not the stated purpose of the hearing, much of the time was spent arguing the merits of an Internet Sales tax.   Interestingly, the witness representing the National Council of State Legislatures appeared to support the concept of the underlying bill and was forced into intellectual contortions to justify why it shouldn’t apply to an internet sales tax regime.  While Democrats on the subcommittee came out unified in strong opposition of the underlying bill, Republicans, were more split, though they appeared to generally concur with the concept of the bill, arguing from a states’ rights perspective that states needed to “retain autonomy over their own affairs,”
Quarles, Otting Suggest Reg Flexibility in Senate Banking Nom Hearing
On Thursday, the Senate Banking Committee held a nomination hearing for Joseph Otting to become Comptroller of Currency and Randal Quarles to become Vice-Chair for Supervision at the Federal Reserve, two of the nation’s top regulatory posts, including the Vice-Chair position which has never been officially filled since its creation by the Dodd-Frank Act seven years ago. Both nominees flexed their credentials, and to Republicans’ delight, offered suggestions on areas where they may be able to simplify regulations. Democrats mounted significant attacks on both nominees’ past, but given the Republican majority in the Senate, neither nomination is considered to be in danger. The date of a committee vote on the nominations has not yet been announced.
Senate Passes Russian Sanctions, Heads to Trump’s Desk
On Thursday, The Senate overwhelmingly passed House passed a bipartisan sanctions package targeting Russia, Iran and North Korea in an overwhelming 98-2 vote. The sanctions also passed in the House with near unanimous consent on a 419-3 vote. The bill — which would constrain President Donald Trump’s bid to defrost relations with Moscow by allowing Congress to block any attempt to ease or end penalties against President Vladimir Putin's government — now heads to the president’s desk, where he is expected to sign it – despite earlier indications that he might not.  
Warner Introduces Senate Companion to ‘Valid When Made’ Bill
On Thursday, Sen. Mark Warner (D-VA) introduced a bill to solidify that bank loans — if legally made — can be resold and collected on by nonbank entities at the same interest rate. The measure joins legislation that as introduced in the House by Rep. Patrick McHenry (R-NC). Both bills would re-establish that "a loan that is valid at inception cannot become usurious upon the subsequent sale or transfer of the loan to another person," essentially negating decision made in the 2015 Second Circuit Court of Appeals decision in a case known as Madden v. Midland Funding. The decision cast doubt on previous case law that nonbanks that bought loans from banks could apply the same interest rate, even if it is higher than the state in which the borrower resides.
Mnuchin Talks Debt Ceiling, ‘Internet Tax’ in Senate Approps Hearing
On Wednesday, Treasury Secretary Steven Mnuchin testified at a hearing for the Senate Appropriations Subcommittee on Financial Services on his department’s fiscal 2018 budget. Mnuchin used the opportunity to urge Congress to act on the debt ceiling sooner rather than later, saying that there is a “real cost” to using the Treasury’s so-called “extraordinary measures” to ensure that the country keeps making payments on its debt. In light of recent tweets from President Trump, Secretary Mnuchin was also asked about taxes collected by online realtors, responding that it is “really more a function of collection” than a failure of policy.  
Banking Committee Moves HUD Nominees to Senate Floor
Prior to the hearing for the Comptroller of Currency and Federal Reserve nominees, the Senate Banking Committee approved three Housing and Urban Development Department nominees to be considered on the Senate floor. The only recorded vote saw the Committee advanced the nomination of Paul Compton to be HUD General Counsel by a 15-7 margin, with Sens. Jon Tester (D-MT) Heidi Heitkamp (D-ND), and Joe Donnelly (D-IN) joining Republicans in approval . The nominations of Anna Farias to be Assistant Secretary for fair housing and Neal Rackleff to be Assistant Secretary for community planning and development were approved on voice votes.
Select Highlights from the Administration
The White House
White House Releases Tax Reform Principles Statement
On Thursday, the big six” working group — consisting of Treasury Secretary Steven Mnuchin, White House economic policy chief Gary Cohn, House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell, Senate Finance Committee Chairman Orrin Hatch, and House Ways and Means Chairman Kevin Brady —issued a statement outlining their renewed principles for comprehensive tax reform. While heavy on rhetoric but light on details, the outline suggests that Republican leadership hopes to move legislation through the House and Senate committees of jurisdiction this fall under regular order. Among the policy priorities noted in the document are (1) allowing “unprecedented” capital expensing; (2) prioritizing permanence; (3) lowering business tax rates; and notably (4) leaving the border adjustment tax (BAT) out of any future tax reform plans.
Federal Reserve
Fed Announces Volcker Rule Rollbacks
On Monday, the Federal Reserve announced that it was modifying some of its Volcker Rule compliance requirements, including how much time banks have to  start up and spin off new hedge funds and private equity funds.  This announcement marked the second time in as many weeks that the Fed had announced modifications for banks complying with the Volcker Rule, a Dodd-Frank era law that generally prohibits banks from holding significant investments in hedge funds and private equity funds.  
Department of Labor
Labor Department Requests Stay in Fiduciary Rule Court Challenge
On Thursday, Department of Labor (DOL) attorneys requested that a Minnesota court — separate from the ongoing challenge in the U.S. Fifth Circuit Court of Appeals — stay proceedings in the case brought by financial planning firm Thrivent against the DOL’s fiduciary rule. The stay was requested on the basis of the DOL’s decision not to defend the best interest contract exemption (BICE) in the Fifth Circuit, although the DOL’s brief defended most of the rule. The DOL’s brief in the Minnesota case states that a “stay of proceedings would be the most efficient use of judicial resources” and that the BICE is “not likely to become applicable to [Thrivent] in the foreseeable future.”
Department of Treasury
Treasury to End Obama ‘myRA’ Program
The Treasury Department announced on Friday that it would phase out the Obama Administration’s “myRA” program that was designed to help people saving for retirement. Treasury officials cited “extremely low” demand for the product, which capped investments at $15,000 and only provided allocation choices from a set of government savings bonds. Existing users of the program will be given information by Treasury in the near future in order to convert their savings from the program into a different individual retirement account.